Table of Contents

 

 

 

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

 

For the month of January, 2019

 

Commission File Number 001-15266

 

BANK OF CHILE
 (Translation of registrant’s name into English)

 

Ahumada 251

Santiago, Chile

 (Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F x  Form 40-F o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes o  No x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-

 

 

 


Table of Contents

 

BANCO DE CHILE
REPORT ON FORM 6-K

 

Attached Banco de Chile’s Consolidated Financial Statements with notes as of December 31, 2018.

 


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2018 and 2017

 


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

 

(Free translation of consolidated financial statements originally issued in Spanish)

 

INDEX

 

I.

 

Consolidated Statements of Financial Position

 

 

 

II.

 

Consolidated Statements of Income

 

 

 

III.

 

Consolidated Statements of Other Comprehensive Income

 

 

 

IV.

 

Consolidated Statements of Changes in Equity

 

 

 

V.

 

Consolidated Statements of Cash Flows

 

 

 

VI.

 

Notes to the Consolidated Financial Statements

 

 

MCh$

=

Millions of Chilean pesos

 

ThUS$

=

Thousands of U.S. dollars

 

UF or CLF

=

Unidad de Fomento

 

 

 

(The UF is an inflation-indexed, Chilean peso denominated monetary unit set daily in advance on the basis of the previous month’s inflation rate).

 

Ch$ or CLP

=

Chilean pesos

 

US$ or USD

=

U.S. dollar

 

JPY

=

Japanese yen

 

EUR

=

Euro

 

HKD

=

Hong Kong dollar

 

CHF

=

Swiss Franc

 

 

 

 

 

IFRS

=

International Financial Reporting Standards

 

IAS

=

International Accounting Standards

 

RAN

=

Compilation of Standards of the Chilean

 

 

 

Superintendency of Banks (“SBIF”)

 

IFRIC

=

International Financial Reporting Interpretations Committee

 

SIC

=

Standards Interpretation Committee

 


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

 

INDEX

 

 

 

Page

Consolidated Statement of Financial Position

1

Consolidated Statements of Income

2

Consolidated Statements of Other Comprehensive Income

3

Consolidated Statement of Changes in Equity

4

Consolidated Statements of Cash Flows

5

1.

Company information:

6

2.

Summary of Significant Accounting Principles:

7

3.

New Accounting Pronouncements:

43

4.

Changes in Accounting policies and Disclosures:

53

5.

Relevant Events

54

6.

Business Segments:

57

7.

Cash and Cash Equivalents:

60

8.

Financial Assets Held-for-trading:

61

9.

Cash collateral on securities borrowed and reverse repurchase agreements:

62

10.

Derivative Instruments and Accounting Hedges:

64

11.

Loans and advances to Banks:

70

12.

Loans to Customers, net:

71

13.

Investment Securities:

78

14.

Investments in Other Companies:

80

15.

Intangible Assets:

83

16.

Property and equipment:

85

17.

Current Taxes and Deferred Taxes:

88

18.

Other Assets:

93

19.

Current accounts and Other Demand Deposits:

94

20.

Savings accounts and Time Deposits:

94

21.

Borrowings from Financial Institutions:

95

22.

Debt Issued:

96

23.

Other Financial Obligations:

100

24.

Provisions:

100

25.

Other Liabilities:

104

26.

Contingencies and Commitments:

105

27.

Equity:

110

28.

Interest Revenue and Expenses:

116

29.

Income and Expenses from Fees and Commissions:

118

30.

Net Financial Operating Income:

119

31.

Foreign Exchange Transactions, Net:

119

32.

Provisions for Loan Losses:

120

33.

Personnel Expenses:

121

34.

Administrative Expenses:

122

35.

Depreciation, Amortization and Impairment:

123

36.

Other Operating Income:

124

37.

Other Operating Expenses:

125

38.

Related Party Transactions:

126

39.

Fair Value of Financial Assets and Liabilities:

132

40.

Maturity of Assets and Liabilities:

145

41.

Risk Management:

147

42.

Subsequent Events:

178

 


Table of Contents

 

Consolidated Financial Statements

BANCO DE CHILE AND SUBSIDIARIES

As of December 31, 2018 and 2017

 


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

For the years ended December 31, 2018 and 2017

(Free translation of consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

 

 

 

 

2018

 

2017

 

 

 

Notes

 

MCh$

 

MCh$

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

7

 

880,081

 

1,057,393

 

Transactions in the course of collection

 

7

 

580,333

 

521,809

 

Financial assets held-for-trading

 

8

 

1,745,366

 

1,616,647

 

Cash collateral on securities borrowed and reverse repurchase agreements

 

9

 

97,289

 

91,641

 

Derivative instruments

 

10

 

1,513,947

 

1,247,829

 

Loans and advances to banks

 

11

 

1,494,307

 

759,702

 

Loans to customers, net

 

12

 

27,307,223

 

24,881,353

 

Financial assets available-for-sale

 

13

 

1,043,440

 

1,516,063

 

Financial assets held-to-maturity

 

13

 

 

 

Investments in other companies

 

14

 

44,561

 

38,041

 

Intangible assets

 

15

 

52,061

 

39,045

 

Property and equipment

 

16

 

215,872

 

216,259

 

Current tax assets

 

17

 

677

 

23,032

 

Deferred tax assets

 

17

 

277,922

 

267,400

 

Other assets

 

18

 

673,380

 

547,974

 

TOTAL ASSETS

 

 

 

35,926,459

 

32,824,188

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Current accounts and other demand deposits

 

19

 

9,584,488

 

8,915,706

 

Transactions in the course of payment

 

7

 

335,575

 

295,712

 

Cash collateral on securities lent and repurchase agreements

 

9

 

303,820

 

195,392

 

Savings accounts and time deposits

 

20

 

10,656,174

 

10,067,778

 

Derivative instruments

 

10

 

1,528,357

 

1,414,237

 

Borrowings from financial institutions

 

21

 

1,516,759

 

1,195,028

 

Debt issued

 

22

 

7,475,552

 

6,488,975

 

Other financial obligations

 

23

 

118,014

 

137,163

 

Current tax liabilities

 

17

 

20,924

 

3,453

 

Deferred tax liabilities

 

17

 

 

 

Provisions

 

24

 

670,119

 

695,868

 

Other liabilities

 

25

 

412,524

 

309,161

 

TOTAL LIABILITIES

 

 

 

32,622,306

 

29,718,473

 

 

 

 

 

 

 

 

 

EQUITY

 

27

 

 

 

 

 

Attributable to Bank’s Owners:

 

 

 

 

 

 

 

Capital

 

 

 

2,418,833

 

2,271,401

 

Reserves

 

 

 

617,597

 

563,188

 

Other comprehensive income

 

 

 

(39,222

)

(8,040

)

Retained earnings:

 

 

 

 

 

 

 

Retained earnings from previous years

 

 

 

17,481

 

16,060

 

Income for the year

 

 

 

594,872

 

576,012

 

Less:

 

 

 

 

 

 

 

Provision for minimum dividends

 

 

 

(305,409

)

(312,907

)

Subtotal

 

 

 

3,304,152

 

3,105,714

 

Non-controlling interests

 

 

 

1

 

1

 

TOTAL EQUITY

 

 

 

3,304,153

 

3,105,715

 

TOTAL LIABILITIES AND EQUITY

 

 

 

35,926,459

 

32,824,188

 

 

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

1


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2018 and 2017

(Free translation of consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

 

 

 

 

2018

 

2017

 

 

 

Notes

 

MCh$

 

MCh$

 

 

 

 

 

 

 

 

 

Interest revenue

 

28

 

1,999,551

 

1,881,443

 

Interest expense

 

28

 

(679,640

)

(652,005

)

Net interest income

 

 

 

1,319,911

 

1,229,438

 

 

 

 

 

 

 

 

 

Income from fees and commissions

 

29

 

505,114

 

471,702

 

Expenses from fees and commissions

 

29

 

(145,159

)

(124,028

)

Net fees and commission income

 

 

 

359,955

 

347,674

 

 

 

 

 

 

 

 

 

Net financial operating income

 

30

 

139,856

 

(8,250

)

Foreign exchange transactions, net

 

31

 

2,701

 

104,875

 

Other operating income

 

36

 

50,860

 

35,533

 

Total operating revenues

 

 

 

1,873,283

 

1,709,270

 

 

 

 

 

 

 

 

 

Provisions for loan losses

 

32

 

(281,410

)

(234,982

)

 

 

 

 

 

 

 

 

OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES

 

 

 

1,591,873

 

1,474,288

 

 

 

 

 

 

 

 

 

Personnel expenses

 

33

 

(442,577

)

(409,331

)

Administrative expenses

 

34

 

(331,477

)

(311,455

)

Depreciation and amortization

 

35

 

(37,681

)

(35,251

)

Impairment

 

35

 

(334

)

(166

)

Other operating expenses

 

37

 

(35,655

)

(33,095

)

 

 

 

 

 

 

 

 

TOTAL OPERATING EXPENSES

 

 

 

(847,724

)

(789,298

)

 

 

 

 

 

 

 

 

NET OPERATING INCOME

 

 

 

744,149

 

684,990

 

 

 

 

 

 

 

 

 

Income attributable to associates

 

14

 

7,255

 

6,057

 

Income before income tax

 

 

 

751,404

 

691,047

 

 

 

 

 

 

 

 

 

Income tax

 

17

 

(156,531

)

(115,034

)

 

 

 

 

 

 

 

 

NET INCOME FOR THE YEAR

 

 

 

594,873

 

576,013

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Bank’s Owners

 

27

 

594,872

 

576,012

 

Non-controlling interests

 

 

 

1

 

1

 

 

 

 

 

 

Ch$

 

Ch$

 

Net income per share attributable to Bank’s Owners:

 

 

 

 

 

 

 

Basic net income per share

 

27

 

5.89

 

5.70

 

Diluted net income per share

 

27

 

5.89

 

5.70

 

 

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

2


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF

OTHER COMPREHENSIVE INCOME

For the years ended December 31, 2018 and 2017

(Free translation of consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

 

 

 

 

2018

 

2017

 

 

 

Notes

 

MCh$

 

MCh$

 

 

 

 

 

 

 

 

 

NET INCOME FOR THE YEAR

 

 

 

594,873

 

576,013

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME THAT WILL BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) on available-for-sale instruments valuation

 

13

 

(11,787

)

1,004

 

Net gains (losses) on derivatives held as cash flow hedges

 

10

 

(30,943

)

14,979

 

Subtotal Other comprehensive income before income taxes

 

 

 

(42,730

)

15,983

 

 

 

 

 

 

 

 

 

Income tax relating to the components of other comprehensive income that are reclassified in income for the year

 

 

 

11,548

 

(4,102

)

 

 

 

 

 

 

 

 

Total other comprehensive income items that will be reclassified subsequently to profit or loss

 

 

 

(31,182

)

11,881

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment for defined benefit plans

 

24

 

(127

)

164

 

 

 

 

 

 

 

 

 

Subtotal other comprehensive income before income taxes

 

 

 

(127

)

164

 

 

 

 

 

 

 

 

 

Income tax relating to the components of other comprehensive income that will not be reclassified to income for the year

 

 

 

35

 

(45

)

 

 

 

 

 

 

 

 

Total other comprehensive income items that will not be reclassified subsequently to profit or loss

 

 

 

(92

)

119

 

 

 

 

 

 

 

 

 

CONSOLIDATED COMPREHENSIVE INCOME FOR THE YEAR

 

 

 

563,599

 

588,013

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Bank’s Owners

 

 

 

563,598

 

588,012

 

Non-controlling interests

 

 

 

1

 

1

 

 

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

3


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, 2018 and 2017

(Free translation of consolidated financial statements originally issued in Spanish)

(Expressed in millions of Chilean pesos)

 

 

 

 

 

 

 

Reserves

 

Other comprehensive income

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

Paid-in
Capital

 

Other
reserves

 

Reserves
from
earnings

 

Unrealized
gains (losses)
on available-
for-sale

 

Derivatives
cash flow hedge

 

Income

 

Retained
earnings
from
previous
periods

 

Income
(losses) for
the year

 

Provision for
minimum
dividends

 

Attributable
to equity
holders of
the parent

 

Non-
controlling
interest

 

Total equity

 

 

 

Notes

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

Tax

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

MCh$

 

Balances as of December 31, 2016

 

 

 

2,138,047

 

31,934

 

454,274

 

847

 

(27,530

)

6,762

 

16,060

 

552,249

 

(285,233

)

2,887,410

 

1

 

2,887,411

 

Capitalization of retained earnings

 

 

 

133,354

 

 

 

 

 

 

 

(133,354

)

 

 

 

 

Retention (release) of profits according to bylaws

 

27

 

 

 

76,861

 

 

 

 

 

(76,861

)

 

 

 

 

Dividends distributions and paid

 

27

 

 

 

 

 

 

 

 

(342,034

)

285,233

 

(56,801

)

(1

)

(56,802

)

Other comprehensive income:

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit plans adjustment

 

 

 

 

119

 

 

 

 

 

 

 

 

119

 

 

119

 

Derivatives cash flow hedge

 

 

 

 

 

 

 

14,979

 

(3,820

)

 

 

 

11,159

 

 

11,159

 

Valuation adjustment on available-for-sale instruments

 

 

 

 

 

 

1,004

 

 

(282

)

 

 

 

722

 

 

722

 

Income for the year 2017

 

27

 

 

 

 

 

 

 

 

576,012

 

 

576,012

 

1

 

576,013

 

Provision for minimum dividends

 

27

 

 

 

 

 

 

 

 

 

(312,907

)

(312,907

)

 

(312,907

)

Balances as of December 31, 2017

 

 

 

2,271,401

 

32,053

 

531,135

 

1,851

 

(12,551

)

2,660

 

16,060

 

576,012

 

(312,907

)

3,105,714

 

1

 

3,105,715

 

Capitalization of retained earnings

 

27

 

147,432

 

 

 

 

 

 

 

(147,432

)

 

 

 

 

Retention (release) of profits according to bylaws

 

27

 

 

 

54,501

 

 

 

 

 

(54,501

)

 

 

 

 

Dividends distributions and paid

 

27

 

 

 

 

 

 

 

 

(374,079

)

312,907

 

(61,172

)

(1

)

(61,173

)

Equity effect change in accounting policy

 

 

 

 

 

 

 

 

 

1,421

 

 

 

1,421

 

 

1,421

 

Other comprehensive income:

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit plans adjustment

 

 

 

 

(92

)

 

 

 

 

 

 

 

(92

)

 

(92

)

Derivatives cash flow hedge

 

 

 

 

 

 

 

(30,943

)

8,354

 

 

 

 

(22,589

)

 

(22,589

)

Valuation adjustment on available-for-sale instruments

 

 

 

 

 

 

(11,787

)

 

3,194

 

 

 

 

(8,593

)

 

(8,593

)

Income for the year 2018

 

27

 

 

 

 

 

 

 

 

594,872

 

 

594,872

 

1

 

594,873

 

Provision for minimum dividends

 

27

 

 

 

 

 

 

 

 

 

(305,409

)

(305,409

)

 

(305,409

)

Balances as of December 31, 2018

 

 

 

2,418,833

 

31,961

 

585,636

 

(9,936

)

(43,494

)

14,208

 

17,481

 

594,872

 

(305,409

)

3,304,152

 

1

 

3,304,153

 

 

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

4


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2018 and 2017

(Free translation of consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

 

 

 

 

2018

 

2017

 

 

 

Notes

 

MCh$

 

MCh$

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

 

594,873

 

576,013

 

Items that do not represent cash flows:

 

 

 

 

 

 

 

Depreciation and amortization

 

35

 

37,681

 

35,251

 

Impairment

 

35

 

334

 

166

 

Provision for loans and accounts receivable from customers and owed by banks

 

32

 

344,490

 

280,109

 

Provision of contingent loans

 

32

 

(2,501

)

4,350

 

Fair value adjustment of financial assets held-for-trading

 

 

 

(663

)

1,614

 

Changes in assets and liabilities by deferred taxes

 

17

 

(7,819

)

13,987

 

(Gain) loss attributable to investments in companies with significant influence, net

 

14

 

(6,811

)

(5,511

)

(Gain) loss from sales of assets received in lieu of payment,net

 

36

 

(8,779

)

(6,212

)

(Gain) loss on sales of property and equipment, net

 

36-37

 

(3,632

)

(623

)

Charge-offs of assets received in lieu of payment

 

37

 

6,638

 

7,550

 

Other charges (credits) to income that do not represent cash flows

 

 

 

(3,900

)

(473

)

Change in the exchange rate of assets and liabilities

 

 

 

(116,121

)

38,374

 

Net interest variation, readjustment and accrued fees on assets and liabilities

 

 

 

161,169

 

(54,294

)

 

 

 

 

 

 

 

 

Changes in assets and liabilities that affect operating cash flows:

 

 

 

 

 

 

 

(Increase) decrease in loans and advances to banks, net

 

 

 

(734,330

)

413,572

 

(Increase) decrease in loans to customers

 

 

 

(2,687,964

)

(464,748

)

(Increase) decrease in financial assets held-for-trading, net

 

 

 

275,225

 

36,398

 

(Increase) decrease in other assets and liabilities

 

 

 

(162,604

)

41,348

 

Increase (decrease) in current account and other demand deposits

 

 

 

668,521

 

594,306

 

Increase (decrease) in payables from repurchase agreements and security lending

 

 

 

98,570

 

(20,474

)

Increase (decrease) in savings accounts and time deposits

 

 

 

579,827

 

(441,173

)

Sale of assets received in lieu of payment or adjudicated

 

 

 

31,403

 

17,950

 

Total cash flows from operating activities

 

 

 

(936,393

)

1,067,480

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

(Increase) decrease in financial assets available-for-sale, net

 

 

 

463,558

 

(1,139,029

)

Purchases of property and equipment

 

16

 

(28,065

)

(23,224

)

Sales of property and equipment

 

 

 

3,640

 

652

 

Acquisition of intangible assets

 

15

 

(23,512

)

(18,779

)

Acquisition of investments in companies

 

 

 

(30

)

 

Dividends received from investments in companies

 

 

 

855

 

1,030

 

Total cash flows from investing activities

 

 

 

416,446

 

(1,179,350

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Redemption of letters of credit

 

 

 

(4,388

)

(5,818

)

Issuance of bonds

 

22

 

2,157,587

 

1,399,001

 

Redemption of bonds

 

 

 

(1,436,232

)

(1,024,758

)

Dividends paid

 

27

 

(374,079

)

(342,034

)

Increase (decrease) in borrowings from foreign financial institutions

 

 

 

320,635

 

154,552

 

Increase (decrease) in other financial obligations

 

 

 

(8,753

)

(44,938

)

Increase (decrease) in other obligations with Central Bank of Chile

 

 

 

(1

)

(2

)

Other long-term borrowings

 

 

 

15

 

8

 

Payment of other long-term borrowings

 

 

 

(9,814

)

(3,349

)

Total cash flows from financing activities

 

 

 

644,970

 

132,662

 

 

 

 

 

 

 

 

 

TOTAL NET POSITIVE (NEGATIVE) CASH FLOWS FOR THE YEAR

 

 

 

125,023

 

20,792

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes

 

 

 

116,121

 

(38,374

)

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

 

 

2,079,398

 

2,096,980

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

7

 

2,320,542

 

2,079,398

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

MCh$

 

MCh$

 

Operational Cash flow interest:

 

 

 

 

 

 

 

Interest received

 

 

 

1,881,766

 

1,928,523

 

Interest paid

 

 

 

(400,686

)

(753,379

)

 

The accompanying notes 1 to 42 are an integral part of these consolidated financial statements

 

5


Table of Contents

 

BANCO DE CHILE AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

1.                           Company information:

 

Banco de Chile is authorized to operate as a commercial bank since September 17, 1996, being, in conformity with the stipulations of article 25 of Law No. 19,396, the legal continuation of Banco de Chile resulting from the merger of the Banco Nacional de Chile, Banco Agrícola and Banco de Valparaiso, which was constituted by public deed dated October 28, 1893, granted before the Notary Public of Santiago, Mr. Eduardo Reyes Lavalle, authorized by Supreme Decree of November 28, 1893.

 

Banco de Chile (or the “Bank”) is a Corporation organized under the laws of the Republic of Chile, regulated by the Superintendency of Banks and Financial Institutions (“SBIF” or “Superintendency”). Since 2001, it is subject to the supervision of the Securities and Exchange Commission of the United States of America (“SEC”), in consideration of the fact that the Bank is registered on the New York Stock Exchange (“NYSE”), through a program of American Depositary Receipt (“ADR”).

 

Banco de Chile offers a broad range of banking services to its customers, ranging from individuals to large corporations. The services are managed in the areas of corporations and large companies, medium and small companies and personal and consumer banking. Additionally, the Bank offers international as well as treasury banking services, in addition to those offered by subsidiaries that include securities brokerage, mutual fund and investment management, insurance brokerage, financial advisory services and securitization.

 

Banco de Chile’s legal address is Ahumada 251, Santiago, Chile and its website is www.bancochile.cl.

 

The Consolidated Financial Statements of Banco de Chile, for the period ended December 31, 2018 were approved by the Directors on January 24, 2019.

 

6


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles:

 

(a)                       Basis of preparation:

 

The General Banking Law in its Article No. 15 authorizes the Chilean Superintendency of Banks (SBIF) to issue generally applicable accounting standards for entities it supervises. The Corporations Law, in turn, requires generally accepted accounting principles to be followed.

 

Based on the aforementioned laws, banks should use the criteria provided by the Superintendency in accordance with the Compendium of Accounting Standards (which differ in certain aspects with the International Financial Reporting Standards “IFRS”), and any matter not addressed therein, as long as it does not contradict its instructions, they must adhere to the Generally Accepted Accounting Principles , which correspond to the technical standards issued by the Chilean Accountants Association,  which coincide with the IFRS agreed by the International Accounting Standards Board (IASB). In case of discrepancies between these generally accepted accounting principles and the accounting criteria issued by the SBIF, the latter shall prevail.

 

(b)                       Basis of consolidation:

 

The financial statements of Banco de Chile as of December 31, 2018 and 2017 have been consolidated with its Chilean subsidiaries and foreign subsidiary using the global integration method (line-by-line).  They include preparation of individual financial statements of the Bank and companies that participate in the consolidation and it include adjustments and reclassifications necessary to homologue accounting policies and valuation criteria applied by the Bank.  The Consolidated Financial Statements have been prepared using the same accounting policies for similar transactions and other events in equivalent circumstances.

 

Significant intercompany transactions and balances (assets, liabilities, equity, income, expenses and cash flows) originated in operations performed between the Bank and its subsidiaries and between subsidiaries have been eliminated in the consolidation process.  The non-controlling interest corresponding to the participation percentage of third parties in subsidiaries, which the Bank does not own directly or indirectly, has been recognized and is shown separately in the consolidated shareholders’ equity of Banco de Chile.

 

7


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(b)                     Basis of consolidation, continued:

 

(i)                           Subsidiaries

 

Consolidated financial statements as of December 31, 2018 and 2017 incorporate financial statements of the Bank and its subsidiaries.  According IFRS 10 — “Consolidated Financial Statements”, control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. Specifically the Bank have power over the investee when has existing rights that give it the ability to direct the relevant activities of the investee.

 

When the Bank has less than a majority of the voting rights of an investee, but these voting rights are enough to have the ability to direct the relevant activities unilaterally, then conclude the Bank has control.  The Bank considers all factors and relevant circumstances to evaluate if their voting rights are enough to obtain the control, which it includes:

 

·                              The amount of voting rights that the Bank has, related to the amount of voting rights of the others stakeholders.

 

·                              Potential voting rights maintained by the Bank, other holders of voting rights or other parties.

 

·                              Rights emanated from other contractual arrangements.

 

·                              Any additional circumstance that indicate that the Bank have or have not the ability to manage the relevant activities when that decisions need to be taken, including behavior patterns of vote in previous shareholders meetings.

 

8


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(b)                       Basis of consolidation, continued:

 

(i)                           Subsidiaries, continued:

 

The Bank reevaluates if it has or has not the control over an investee when the circumstances indicates that exists changes in one or more elements of control listed above.

 

The entities controlled by the Bank and which form parts of the consolidation are detailed as follows:

 

 

 

 

 

 

 

 

 

Interest Owned

 

 

 

 

 

 

 

 

 

Direct

 

Indirect

 

Total

 

 

 

 

 

 

 

Functional

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

RUT

 

Subsidiaries

 

Country

 

Currency

 

%

 

%

 

%

 

%

 

%

 

%

 

96,767,630-6

 

Banchile Administradora General de Fondos S.A.

 

Chile

 

Ch$

 

99.98

 

99.98

 

0.02

 

0.02

 

100.00

 

100.00

 

96,543,250-7

 

Banchile Asesoría Financiera S.A.

 

Chile

 

Ch$

 

99.96

 

99.96

 

 

 

99.96

 

99.96

 

77,191,070-K

 

Banchile Corredores de Seguros Ltda.

 

Chile

 

Ch$

 

99.83

 

99.83

 

0.17

 

0.17

 

100.00

 

100.00

 

96,571,220-8

 

Banchile Corredores de Bolsa S.A.

 

Chile

 

Ch$

 

99.70

 

99.70

 

0.30

 

0.30

 

100.00

 

100.00

 

96,932,010-K

 

Banchile Securitizadora S.A.

 

Chile

 

Ch$

 

99.01

 

99.01

 

0.99

 

0.99

 

100.00

 

100.00

 

96,645,790-2

 

Socofin S.A.

 

Chile

 

Ch$

 

99.00

 

99.00

 

1.00

 

1.00

 

100.00

 

100.00

 

 

(ii)                        Associates and Joint Ventures

 

Associates

 

An associate is an entity over whose operating and financial management policy decisions the Bank has significant influence, without to have the control over the associate. Significant influence is generally presumed when the Bank holds between 20% and 50% of the voting rights. Other considered factors when determining whether the Bank has significant influence over another entity are the representation on the board of directors and the existence of material intercompany transactions. The existence of these factors could determine the existence of significant influence over an entity even though the Bank had participation less than 20% of the voting rights.

 

Investments in associates where exists significant influence, are accounted for using the equity method. In accordance with the equity method, the Bank’s investments are initially recorded at cost, and subsequently increased or decreased to reflect the proportional participation of the Bank in the net income or loss of the associate and other movements recognized in its shareholders’ equity. Goodwill arising from the acquisition of an associate is included in the net book value, net of any accumulated impairment loss.

 

9


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(b)                       Basis of consolidation, continued:

 

(ii)                       Associates and Joint Ventures, continued:

 

Joint Ventures

 

Joint Ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.  Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

 

According to IFRS 11 “Joint Arrangements”, an entity will determine the type of joint arrangement in which it is involved, and may classify the agreement as a “Joint operation” or a “Joint venture”.

 

For investments defined like “Joint Operation”, their assets, liabilities, income and expenses are recognised by their participation in joint operation.

 

For investments defined like “Joint Venture”, they will be registered according equity method.

 

Investments that, for their characteristics, are defined like “Joint Ventures” are the following:

 

·                  Artikos S.A.

·                  Servipag Ltda.

 

(ii)                        Shares or rights in other companies

 

These are entities in which the Bank does not have significant influence. They are presented at acquisition value (historical cost).

 

(iv)                    Special purpose entities

 

According to current regulation, the Bank must be analyzing periodically its consolidation area, considering that the principal criteria are the control that the Bank has in an entity and not its percentage of equity participation.

 

As of December 31, 2018 and 2017 the Bank does not control and has not created any SPEs.

 

10


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(b)                       Basis of consolidation, continued:

 

(v)                     Fund management

 

The Bank and its subsidiaries manage and administer assets held in mutual funds and other investment products on behalf of investors, perceiving a paid according to the service provided and according to market conditions. Managed resources are owned by third parties and therefore not included in the Statement of Financial Position.

 

According to established in IFRS 10, for consolidation purposes is necessary to assess the role of the Bank and its subsidiaries with respect to the funds they manage, must determine whether that role is Agent or Principal. This assessment should consider the following:

 

· The scope of their authority to make decisions about the investee.

· The rights held by third parties.

· The remuneration to which he is entitled under remuneration arrangements.

· Exposure, decision maker, the variability of returns from other interests that keeps the investee.

 

The Bank and its subsidiaries manage on behalf and for the benefit of investors, acting in that relationship only as Agent. Under this category, and as provided in the aforementioned rule, do not control these funds when they exercise their authority to make decisions. Therefore, as of December 31, 2018 and 2017 act as agent, and therefore do not consolidate any fund.

 

(c)                        Non-controlling interest:

 

Non-controlling interest represents the share of losses, income and net assets that the Bank does not control, neither directly or indirectly. It is presented as a separate item in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Financial Position.

 

(d)                     Use of estimates and judgment:

 

Preparing financial statements requires management to make judgments, estimations and assumptions that affect the application of accounting policies and the valuation of assets, liabilities, income and expenses presented. Real results could differ from these estimated amounts. Details on the use of estimates and judgment and their effect on the amounts recognized in the Consolidated Financial Statement are included in the following notes:

 

1.                           Provision for loan losses (Note No. 11. No. 12 and No. 32);

2.                           Useful life of intangible and property and equipment (Notes No.15 and No.16);

3.                          Income taxes and deferred taxes (Note No. 17);

4.                          Provisions (Note No. 24);

5.                          Contingencies and Commitments (Note No. 26);

6.                          Fair value of financial assets and liabilities (Note No. 39).

 

11


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(d)                     Use of estimates and judgments, continued:

 

Estimates and relevant assumptions are regularly reviewed by the management of the Bank, according to quantify certain assets, liabilities, gains, loss and commitments. Estimates reviewed are registered in income in the period that the estimate is reviewed.

 

During the year ended December 31, 2018 there have been no significant changes in the estimates made other than those disclosed in Note No. 4 “Changes in Accounting policies and Disclosures”.

 

(e)                      Financial asset and liability valuation criteria:

 

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the Statement of Financial Position and the Comprehensive Income. This involves selecting the particular basis or method of measurement.

 

In the Consolidated Financial Statements several measuring bases are used with different levels mixed among them. These bases or methods include the following:

 

(i)                           Initial recognition

 

The Bank and its subsidiaries recognize loans to customers, trading and investment securities, deposits, debt issued and subordinated liabilities and other assets o liabilities on the date of negotiation.  Purchases and sales of financial assets performed on a regular basis are recognized as of the trade date on which the Bank committed to purchase or sell the asset.

 

(ii)                     Classification

 

Assets, liabilities and income accounts have been classified in conformity with standards issued by the Superintendency of Banks and Financial Institutions (“SBIF”).

 

12


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(e)                        Financial asset and liability valuation criteria, continued:

 

(iii)                  Derecognition of financial assets and financial liabilities

 

The Bank and its subsidiaries derecognize a financial asset (or where applicable part of a financial asset) from its Consolidated Statement of Financial Position when the contractual rights to the cash flows of the financial asset have expired or when the contractual rights to receive the cash flows of the financial asset are transferred during a transaction in which all ownership risks and rewards of the financial asset are transferred.  Any portion of transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability.

 

When the Bank transfers a financial asset, it assesses to what extent it has retained the risks and rewards of ownership.  In this case:

 

(a)                       If substantially all risks and rewards of ownership of the financial asset have been transferred, it is derecognized, and any rights or obligations created or retained upon transfer are recognized separately as assets or liabilities.

 

(b)                      If substantially all risks and rewards of ownership of the financial asset have been retained, the Bank continues to recognize it.

 

(c)                        If substantially all risks and rewards of ownership of the financial asset are neither transferred nor retained, the Bank will determine if it has retained control of the financial asset.  In this case:

 

(i)                                     If the Bank has not retained control, the financial asset will be derecognized, and any rights or obligations created or retained upon transfer will be recognized separately as assets or liabilities.

 

(ii)                                  If the Bank has retained control, it will continue to recognize the financial asset in the Consolidated Financial Statement by an amount equal to its exposure to changes in value that can experience and recognize a financial liability associated to the transferred financial asset.

 

The Bank derecognizes a financial liability (or a portion thereof) from its Consolidated Statement of Financial Position if, and only if, it has extinguished or, in other words, when the obligation specified in the corresponding contract has been paid or settled or has expired.

 

13


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(e)                       Financial asset and liability valuation criteria, continued:

 

(iv)                    Offsetting

 

Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position if, and only if, the Bank has the legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis or to realize an asset and settle the liability simultaneously.

 

Income and expenses are shown net only if accounting standards allow such treatment, or in the case of gains and losses arising from a group of similar transactions such as the Bank’s trading activities.

 

(v)                    Valuation at amortized cost

 

Amortized cost is the amount at which a financial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization (calculated using the effective interest rate method) of any difference between that initial amount and the maturity amount and minus any reduction for impairment.

 

(vi)                 Fair value measurements

 

Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The most objective and common fair value is the price that you would pay on an active, transparent and deep market (“quoted price” or “market price”).

 

When available, the Bank estimates the fair value of an instrument using quoted prices in an active market for that instrument.  A market is considered active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

 

If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. These valuation techniques include the use of recent market transactions between knowledgeable, willing parties in an arm’s length transaction, if available, as well as references to the fair value of other instruments that are substantially the same, discounted cash flows and options pricing models.

 

The chosen valuation technique use the maximum observable market data, relies as little as possible on estimates performed by the Bank, incorporates factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments.  Inputs into the valuation technique reasonably represent market expectations and include risk and return factors that are inherent in the financial instrument.  Periodically, the Bank calibrates the valuation techniques and tests it for validity using prices from observable current market transaction in the same instrument or based on any available observable market data.

 

14


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(e)                      Financial asset and liability valuation criteria, continued:

 

(vi)                 Fair value measurements, continued:

 

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. However, when transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in income.

 

On the other hand, it should be noted that the Bank has financial assets and liabilities offset each other’s market risks, based on which average market prices are used as a basis for determining their fair value.

 

Then, the fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Bank believes that a third-party market participant would take them into account in pricing a transaction.

 

The Bank’s fair value disclosures are included in Note No. 39.

 

(f)                       Functional currency:

 

The items included in the financial statements of each of the entities of Banco de Chile and its subsidiaries are valued using the currency of the primary economic environment in which it operates (functional currency).  The functional currency of Banco de Chile is the Chilean peso, which is also the currency used to present the entity’s consolidated financial statements, that is the currency of the primary economic environment in which the Bank operates, as well as obeying to the currency that influences in the costs and income structure.

 

(g)                      Transactions in foreign currency:

 

Transactions in currencies other than the functional currency are considered to be in foreign currency and are initially recorded at the exchange rate of the functional currency on the transaction date. Monetary assets and liabilities denominated in foreign currencies are converted using the exchange rate of the functional currency as of the date of the Statement of Financial Position.  All differences are recorded as a debit or credit to income.

 

15


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(g)                          Transactions in foreign currency, continued:

 

As of December 31, 2018, the Bank applied the exchange rate of accounting representation according to the standards issued by the Superintendency of Banks, where assets expressed in dollars are shown to their equivalent value in Chilean pesos calculated using the following exchange rate of Ch$693.60 US$1 (Ch$615.43 to US$1 in 2017).

 

The gain of Ch$2,701 million for net foreign exchange transactions, net (foreign exchange income of Ch$104,875 million in 2017) shown in the Consolidated Statement of Comprehensive Income, includes recognition of the effects of exchange rate variations on assets and liabilities in foreign currency or indexed to exchange rates, and the result of foreign exchange transactions conducted by the Bank and its subsidiaries.

 

(h)                     Business Segments:

 

The Bank’s operating segments are determined based on its different business units, considering the following factors:

 

(i)                           That it conducts business activities from which income is obtained and expenses are incurred (including income and expenses relating to transactions with other components of the same entity).

 

(ii)                        That its operating results are reviewed regularly by the entity’s highest decision-making authority for operating decisions, to decide about resource allocation for the segment and evaluate its performance; and

 

(iii)                     That separate financial information is available.

 

(i)                         Cash and cash equivalents:

 

The Consolidated Statement of Cash Flows shows the changes in cash and cash equivalents derived from operating activities, investment activities and financing activities during the year.  The indirect method has been used in the preparation of this statement of cash flows.

 

16


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(i)                         Cash and cash equivalents, continued:

 

For the preparation of Consolidated Financial Statements of Cash Flow it is considered the following concepts:

 

(i)                           Cash and cash equivalents correspond to “Cash and Bank Deposits”, plus (minus) the net balance of transactions in the course of collection that are shown in the Consolidated Statement of Financial Position, plus instruments held-for-trading and available-for-sale that are highly liquid and have an insignificant risk of change in value, maturing in less than three months from the date of acquisition, plus repurchase agreements that are in that situation.  Also includes investments in fixed income mutual funds, according to instructions of the SBIF, that are presented under “Trading Instruments” in the Consolidated Statement of Financial Position.

 

(ii)                        Operating activities: corresponds to normal activities of the Bank, as well as other activities that cannot classify like investing or financing activities.

 

(iii)                     Investing activities: correspond to the acquisition, sale or disposition other forms, of long-term assets and other investments that not include in cash and cash equivalent.

 

(iv)                    Financing activities: corresponds to the activities that produce changes in the amount and composition of the equity and the liabilities that are not included in the operating or investing activities.

 

(j)                          Financial assets held-for-trading:

 

Financial assets held-for-trading consist of securities acquired with the intention of generating profits as a result of short-term prices fluctuation or as a result of brokerage activities, or are part of a portfolio on which a short-term profit-generating pattern exists.

 

Financial assets held-for-trading are stated at their fair market value as of the Consolidated Statement of Financial Position date.  Gains or losses from their fair market value adjustments, as well as gains or losses from trading activities, are included in “Gains (losses) from trading and brokerage activities” in the Consolidated Statement of Comprehensive Income.  Accrued interest and revaluations are reported as “Gains (losses) from trading and brokerage activities”.

 

17


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(k)                     Repurchase agreements and security lending and borrowing transactions:

 

The Bank engages in transactions with repurchase agreements as a form of investment.  The securities purchased under these agreements are recognized on the Bank’s Consolidated Statement of Financial Position under “Receivables from Repurchase Agreements and Security Lending”, which is valued in accordance with the agreed-upon interest rate, through of method of amortized cost. According to rules, the Bank not register as own portfolio the instruments bought within resale agreements.

 

The Bank also enters into security repurchase agreements as a form of financing.  Investments that are sold subject to a repurchase obligation and serve as collateral for borrowings are reclassified as “Financial Assets held-for-trading” or “Available-for-sale Instruments”. The liability to repurchase the investment is classified as “Payables from Repurchase Agreements and Security Lending”, which is valued in accordance with the agreed-upon interest rate.

 

As of December 31, 2018 and 2017 it not exist operations corresponding to securities lending.

 

(l)                         Derivative instruments:

 

The Bank maintains contracts of Derivative financial instruments, for cover the exposition of risk of foreign currency and interest rate.  These contracts are recorded in the Consolidated Statement of Financial Position at their cost (included transactions costs) and subsequently measured at fair value.  Derivative instruments are reported as an asset when their fair value is positive and as a liability when negative under the item “Derivative Instruments”.

 

Changes in fair value of derivative contracts held for trading purpose are included under “Profit (loss) net of financial operations”, in the Consolidated Statement of Comprehensive Income.

 

In addition, the Bank includes in the valorization of derivatives the “Credit Valuation Adjustment” (CVA), to reflect the counterparty risk in the determination of fair value and the Bank’s own credit risk, known as “Debit valuation adjustment” (DVA).

 

Certain embedded derivatives in other financial instruments are treated as separate derivatives when their risk and characteristics are not closely related to those of the main contract and if the contract in its entirety is not recorded at its fair value with its unrealized gains and losses included in income.

 

At the moment of subscription of a derivative contract must be designated by the Bank as a derivative instrument for trading or hedging purposes.

 

18


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(l)                         Derivative instruments, continued:

 

If a derivative instrument is classified as a hedging instrument, it can be:

 

(1)                       A hedge of the fair value of existing assets or liabilities or firm commitments, or

(2)                       A hedge of cash flows related to existing assets or liabilities or forecasted transactions.

 

A hedge relationship for hedge accounting purposes must comply with all of the following conditions:

 

(a)             at its inception, the hedge relationship has been formally documented;

(b)             it is expected that the hedge will be highly effective;

(c)              the effectiveness of the hedge can be measured in a reasonable manner; and

(d)             the hedge is highly effective with respect to the hedged risk on an ongoing basis and throughout the entire hedge relationship.

 

The Bank presents and measures individual hedges (where there is a specific identification of hedged item and hedged instruments) by classification, according to the following criteria:

 

Fair value hedges: changes in the fair value of a hedged instruments derivative, designed like “fair value hedges”, are recognized in income under the line “Net interest income” and/or “Foreign exchange transactions, net”. Hedged item also is presented to fair value, related to the risk to be hedge. Gains or losses from hedged risk are recognized in income under the line “Net interest income” and adjust the book value of item hedged.

 

19


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(l)                         Derivative instruments, continued:

 

Cash flow hedge: changes in the fair value of financial instruments derivative designated like “cash flow hedge” are recognised in “Other Comprehensive Income”, to the extent that hedge is effective and hedge is reclassified to income in the item “Net interest income” and/or “Foreign exchange transactions, net”, when hedged item affects the income of the Bank produced for the “interest rate risk” or “foreign exchange risk”, respectively.  If the hedge is not effective, changes in fair value are recognised directly in income in the item “Net financial operating income”.

 

If the hedged instruments does not comply with criteria of hedge accounting of cash flow, it expires or is sold, it suspend or executed, this hedge must be discontinued prospectively.  Accumulated gains or losses recognised previously in the equity are maintained there until projected transactions occur, in that moment will be registered in Consolidated Statement of Income (in the item “Net interest income” and/or “Foreign exchange transactions, net”, depend of the hedge), lesser than it foresees that the transaction will not execute, in this case it will be registered immediately in Consolidated Statement of Income (in the item “Net interest income” and/or “Foreign exchange transactions, net”, depend of the hedge).

 

(m)                 Loans to customers:

 

Loans to customers include originated and purchased non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and which the Bank does not intend to sell immediately or in the short-term.

 

(i)                 Valuation method

 

Loans are initially measured at cost plus incremental transaction costs, and subsequently measured at amortized cost using the effective interest rate method, except when the Bank defined some loans as hedged items, which are measured at fair value, changes are recorded in the Consolidated Statement of Income, as described in letter (l) of this note.

 

20


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(ii)                     Lease contracts

 

Accounts receivable for leasing contracts, included under the caption “Loans to customers” correspond to periodic rent installments of contracts which meet the definition to be classified as financial leases and are presented at their nominal value net of unearned interest as of each year-end.

 

(iii)                  Factoring transactions

 

Corresponds to invoices and other commercial instruments representative of credit, with or without recourse, received in discount and which are registered to book value plus interest and adjustments until to maturity.

 

In those cases where the transfer of these instruments it was made without responsibility of the grantor, the Bank assumes the default risk.

 

(iv)                    Impairment of loans

 

The impaired loans include the following assets, according to Chapter B-1 of Accounting rules Compendium of Superintendency of Banks:

 

a)        In case of debtors subject to individual assessment, are considered in impaired   portfolio “Non-complying loans” and the categories B3 y B4 of “Substandar loans” defined in letter m) v.i).

 

b)        Debtors subject to assessment group evaluation, the impaired portfolio includes all credits of the “Non-complying loans” defined in letter m) v. iv).

 

(v)                      Allowance for loan losses

 

Allowances are required to cover the risk of loan losses have been established in accordance with the instructions issued by the Superitendency of Banks.  The loans are presented net of those allowances and, in the case of loans and in the case of contingent loans, they are shown in liabilities under “Provisions”.

 

In accordance with what is stipulated by the Superintendency of Banks, models or methods are used based on an individual and group analysis of debtors, to establish allowance for loan losses.

 

21


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(v)                       Allowance for loan losses, continued:

 

(v.i)   Allowance for individual evaluations:

 

An individual analysis of debtors is applied to individuals and companies that are of such significance with respect to size, complexity or level of exposure to the bank, that they must be analyzed in detail.

 

Likewise, the analysis of borrowers should focus on its credit quality related to the ability to payment, to have sufficient and reliable information, and to analyze in regard to guarantees, terms, interest rates, currency and revaluation, etc.

 

For purposes of establish the allowances, the banks must be asses the credit quality, then classify to one of three categories of loans portfolio: Normal, Substandard and Non-complying Loans, it must classify the debtors and their operations related to loans and contingent loans in the categories that apply.

 

v.i.1 Normal Loans and Substandard Loans:

 

Normal loans correspond to borrowers who are up to date on their payment obligations and show no sign of deterioration in their credit quality. Loans classified in categories A1 through A6.

 

Substandard loans includes all borrowers with insufficient payment capacity or significant deterioration of payment capacity that may be reasonably expected not to comply with all principal and interest payments obligations set forth in the credit agreement.

 

This category also includes all loans that have been non-performing for more than 30 days.  Loans classified in this category are B1 through B4.

 

As a result of individual analysis of the debtors, the banks must classify them in the following categories, assigning, subsequently, the percentage of probability of default and loss given default resulting in the corresponding percentage of expected loss:

 

Classification

 

Category of
the debtors

 

Probability of
default (%)

 

Loss given
default (%)

 

Expected
loss (%)

Normal Loans

 

A1

 

0.04

 

90.0

 

0.03600

 

A2

 

0.10

 

82.5

 

0.08250

 

A3

 

0.25

 

87.5

 

0.21875

 

A4

 

2.00

 

87.5

 

1.75000

 

A5

 

4.75

 

90.0

 

4.27500

 

A6

 

10.00

 

90.0

 

9.00000

Substandard Loans

 

B1

 

15.00

 

92.5

 

13.87500

 

B2

 

22.00

 

92.5

 

20.35000

 

B3

 

33.00

 

97.5

 

32.17500

 

B4

 

45.00

 

97.5

 

43.87500

 

22


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(v)                       Allowance for loan losses, continued:

 

(v.i)   Allowance for individual evaluations, continued:

 

v.i.1 Normal Loans and Substandard Loans, continued:

 

Allowances for Normal and Substandard Loans:

 

To determine the amount of allowances to be constitute for normal and substandard portfolio, previously should be estimated the exposure to subject to the allowances, which will be applied to respective expected loss (expressed in decimals), which consist of probability of default (PD) and loss given default (LGD) established for the category in which the debtor and/or guarantor belong, as appropriate.

 

The exposure affects to allowances applicable to loans plus contingent loans minus the amounts to be recovered by way of the foreclosure of financial or real guarantees of the operatios.  Also, in some cases, the risk credit of direct debtor can be replaced by credit quality of aval or surety. Loans means the book value of credit of the respective debtor, while for contingent loans, the value resulting from to apply the indicated in No.3 of Chapter B-3 of Compilation of Standards of the Chilean Superintendency of Banks (RAN).

 

The banks must use the following equation:

 

 

Where:

 

ESA           = Exposure subject to allowances

GE                  = Guaranteed exposure

ESA           = (Loans + Contingent Loans) – Financial Guarantees

 

However, independent of the results obtained from the equation above, the bank must be assigned a minimum provision level of 0.50% of the Normal Loans (including contingent loans).

 

v.i.2 Non-complying Loans

 

The non-complying loans corresponds to borrowers and its credits whose payment capacity is seriously at risk and who have obvious signs that the will not pay in the future.  This category comprises all loans and contingent loans outstanding from debtors that have at least one installment payment of interest or principal overdue for 90 days or more.

 

This portfolio is composed of the debtors belonging to categories C1 to C6 of the rating scale and all credits, including 100% of the amount of contingent loans, held by those same debtors.

 

23


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(v)                       Allowance for loan losses, continued:

 

(v.i)   Allowance for individual evaluations, continued:

 

v.i.2 Non-complying Loans, continued:

 

For purposes to establish the allowances on the non-complying loans, the Bank disposes the use of percentage of allowances to be applied on the amount of exposure, which corresponds to the amount of loans and contingent loans that maintain the same debtor. To apply that percentage, must be estimated a expected loss rate, less the amount of the exposure the recoveries by way of foreclosure of financial or real guarantees that to support the operation and, if there are available specific background, also must be deducting present value of recoveries obtainable exerting collection actions, net of expenses associated with them. This loss percentage must be categorized in one of the six levels defined by the range of expected actual losses by the Bank for all transactions of the same debtor.

 

These categories, their range of loss as estimated by the Bank and the percentages of allowance that definitive must be applied on the amount of exposures, are listed in the following table:

 

Type of Loan

 

Classification

 

Expected loss

 

Allowance (%)

 

 

C1

 

Up to 3%

 

2

 

 

C2

 

More than 3% up to 20%

 

10

Non-complying loans

 

C3

 

More than 20% up to 30%

 

25

 

 

C4

 

More than 30% up to 50%

 

40

 

 

C5

 

More than 50% up to 80%

 

65

 

 

C6

 

More than 80%

 

90

 

For these loans, the expected loss must be calculated in the following manner:

 

Expected loss                    = (TE – R) / TE

Allowance                                     = TE x (AP/100)

 

Where:

 

TE                   = total exposure

R                          = recoverable amount based on estimates of collateral value and collection efforts

AP                   = allowance percentage (based on the category in which the expected loss should be classified).

 

All credits of the debtor must be kept in the Default Portfolio until there is a normalization of their ability or payment behavior, without prejudice to punishment of each particular credit that meets the condition indicated in point (vi) of this letter in order to remove a debtor from the Default Portfolio, once the circumstances that lead to classification in this portfolio according to the present rules have been overcome, at least the following copulative conditions must be met:

 

·       No obligation of the debtor with the bank with more than 30 calendar days overdue.

 

·       No new refinances granted to pay its obligations.

 

·       At least one of the payments includes amortization of capital.

 

·       If the debtor has a credit with partial payment periods less than six months, has already made two payments.

 

·       If the debtor must pay monthly fees for one or more credits, has paid four consecutive dues.

 

·       The debtor does not have direct debts unpaid in the SBIF’s recast information, except in the case of insignificant amounts.

 

24


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(v)                                 Allowance for loan losses, continued:

 

(v.ii)           Allowances for group evaluations

 

Group evaluations are relevant to address a large number of operations whose individual amounts are low or small companies. Such assessments, and the criteria for application, must be consistent with the transaction of give the credit.

 

Group evaluations requires the formation of groups of loans with similar characteristics in terms of type of debtors and conditions agreed, to establish technically based estimates by prudential criteria and following both the payment behavior of the group that concerned as recoveries of defaulted loans and consequently provide the necessary provisions to cover the risk of the portfolio.

 

Banks may use two alternative methods for determining provisions for retail loans that are evaluated as a group.

 

Under first method, it will be used the experience to explain the payment behavior of each homogeneous group of debtors and recoveries through collateral and of collection process, when it correspond, with objective of to estimate directly a percentage of expected losses that will be apply to the amount of the loans of respective group.

 

Under second method, the banks will segment to debtors in homogeneous groups, according described above, associating to each group a determined probability of default and a percentage of recovery based in a historic analysis.  The amount of provisions to register it will be obtained multiplied the total loans of respective group by the percentages of estimated default and of loss given the default.

 

In both methods, estimated loss must be related with type of portfolio and terms of operations.

 

The Bank to determine its provisions has opted for using second method.

 

In the case of consumer loans are not considered collateral for purposes of estimating the expected loss.

 

Allowances are establish according with the results of the application of the methods used by the Bank, distinguishing between allowances over normal portfolio and over the non-complying loans, and those that protect the contingent credit risks associated with these portfolios.

 

25


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(iv)                              Allowance for loan losses, continued

 

(v.iii)        Standard method of provisions for Mortgage Loans

 

According to the established by the SBIF, the provision factor applicable, represented by expected loss over the mortgage loans, it will depend to the past due of each credit and the relation, at the end of month, between outstanding capital and the value of the mortgage guarantees (CMG), according the following table:

 

Provision factor applicable according past due and CMG

 

 

 

 

 

 

Past due days at the end-month

 

CMG

 

Concept

 

0

 

1-29

 

30-59

 

60-89

 

Non – Complying
Loans

 

CMG < 40%

 

PD (%)

 

1.0916

 

21.3407

 

46.0536

 

75.1614

 

100.0000

 

 

 

LGD (%)

 

0.0225

 

0.0441

 

0.0482

 

0.0482

 

0.0537

 

 

 

EAD (%)

 

0.0002

 

0.0094

 

0.0222

 

0.0362

 

0.0537

 

40% < CMG < 80%

 

PD (%)

 

1.9158

 

27.4332

 

52.0824

 

78.9511

 

100.0000

 

 

 

LGD (%)

 

2.1955

 

2.8233

 

2.9192

 

2.9192

 

3.0413

 

 

 

EAD (%)

 

0.0421

 

0.7745

 

1.5204

 

2.3047

 

3.0413

 

80% < CMG < 90%

 

PD (%)

 

2.5150

 

27.9300

 

52.5800

 

79.6952

 

100.0000

 

 

 

LGD (%)

 

21.5527

 

21.6600

 

21.9200

 

22.1331

 

22.2310

 

 

 

EAD (%)

 

0.5421

 

6.0496

 

11.5255

 

17.6390

 

22.2310

 

CMG > 90%

 

PD (%)

 

2.7400

 

28.4300

 

53.0800

 

80.3677

 

100.0000

 

 

 

LGD (%)

 

27.2000

 

29.0300

 

29.5900

 

30.1558

 

30.2436

 

 

 

EAD (%)

 

0.7453

 

8.2532

 

15.7064

 

24.2355

 

30.2436

 

 

Where:

 

PD                      : Probability of default

LGD            : Loss given default

EAD            : Exposure at default

CMG       : Outstanding loan capital Mortgage Guarantee value

 

In the event that a single debtor maintains more than one home mortgage loan with the bank and one of them is 90 days or more behind, all such loans will be assigned to the defaulted portfolio, calculating the provisions for each one of them. They agree with their respective percentages of CMG.

 

26


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(iv)                              Allowance for loan losses, continued:

 

(v.iv) Portfolio in default

 

The portfolio in default includes all placements and 100% of the amount of the contingent loans, of the debtors that the closing of a month presents a delay equal to or greater than 90 days in the payment of the interest of the capital of any credit. It will also include debtors who are granted a credit to leave an operation that has more than 60 days of delay in their payment, as well as those debtors who were subject to forced restructuring or partial forgiveness of a debt.

 

They may exclude from the portfolio in default: a) mortgage loans for housing, which delinquent less than 90 days, unless the debtor has another loan of the same type with greater delinquency; and, b) credits for financing higher studies of Law No. 20,027, which do not yet present the non-compliance conditions indicated in Circular No. 3,454 of December 10, 2008.

 

All credits of the debtor must be kept in the Default Portfolio until there is a normalization of their ability or payment behavior, without prejudice to punishment of each particular credit that meets the condition indicated in point (vi) of this letter in order to remove a debtor from the Default Portfolio, once the circumstances that lead to classification in this portfolio according to the present rules have been overcome, at least the following copulative conditions must be met:

 

·       No obligation of the debtor with the bank with more than 30 calendar days overdue.

 

·       No new refinances granted to pay its obligations.

 

·       At least one of the payments includes amortization of capital. (This condition does not apply in the case of debtors who only have credits for financing higher education in accordance with Law No. 20,027).

 

·       If the debtor has a credit with partial payment periods less than six months, has already made two payments.

 

·       If the debtor must pay monthly fees for one or more credits, has paid four consecutive dues.

 

·       The debtor does not appear with unpaid debts direct according to the information recast by SBIF, except for insignificant amounts.

 

(vi)                 Charge-offs

 

Generally, the charge-offs are produced when the contractual rights on cash flows end. In case of loans, even if the above does not happen, it will proceed to charge-offs the respective asset balances.

 

The charge-off refers to derecognition of the assets in the Statement of Financial Position, related to the respective transaction and, therefore, the part that could not be past-due if a loan is payable in installments, or a lease.

 

The charge-off must be to make using credit risk provisions constituted, whatever the cause for which the charge-off was produced.

 

27


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(vi)                 Charge-offs, continued:

 

(vi.i) Charge-offs of loans to customers

 

Charge-off loans to customers, other than leasing operations, shall be made in accordance to the following circumstances occurs:

 

a)                           The Bank, based on all available information, concludes that will not obtain any cash flow of the credit recorded as an asset.

 

b)                           When the debt without executive title expires 90 days after it was recorded in asset.

 

c)                            At the time the term set by the statute of limitations runs out and as result legal actions are precluded in order to request payment through executive trial or upon rejection or abandonment of title execution issued by judicial and non-recourse resolution.

 

d)                          When past-due term of a transaction complies with the following:

 

Type of Loan

 

Term

 

Consumer loans - secured and unsecured

 

6 months

 

Other transactions - unsecured

 

24 months

 

Commercial loans - secured

 

36 months

 

Residential mortgage loans

 

48 months

 

 

The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due.

 

28


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(m)                 Loans to customers, continued:

 

(vi) Charge-offs, continued:

 

(vi.ii) Charge-offs of lease operations

 

Assets for leasing operations must be charge-offs against the following circumstances, whichever occurs first:

 

a)                           The bank concludes that there is no possibility of the rent recoveries and the value of the property cannot be considered for purposes of recovery of the contract, either because the lessee have not the asset, for the property’s conditions, for expenses that involve its recovery, transfer and maintenance, due to technological obsolescence or absence of a history of your location and current situation.

 

b)                          When it complies the prescription term of actions to demand the payment through executory or upon rejection or abandonment of executory by court.

 

c)                           When past-due term of a transaction complies with the following:

 

Type of Loan

 

Term

Consumer leases

 

6 months

Other non-real estate lease transactions

 

12 months

Real estate leases (commercial or residential)

 

36 months

 

The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due.

 

(vii)  Loan loss recoveries

 

Cash recoveries on charge-off loans including loans that were reacquired from the Central Bank of Chile are recorded directly in income in the Consolidated Statement of Comprehensive Income, as a reduction of the “Provisions for Loan Losses” item.

 

In the event that there are recovery in assets, is recognized in income the revenues for the amount they are incorporated in the asset.  The same criteria will be followed if the leased assets are recovered after the charge-off of a lease operation, to incorporate those to the asset.

 

(viii)  Renegotiations of charge-off transactions

 

Any renegotiation of a credit already written off does not give rise to income, as long as the operation remains to have an impaired quality; the actual payments received must be treated as recoveries of credits written off, as indicated above.

 

Therefore, renegotiated credit can be recorded as an asset only if it has not deteriorated quality; also recognizing revenue from activation must be recorded like recovery of loans.

 

The same criteria should apply in the case that was give credit to pay a charge-off loan.

 

29


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(n)                     Investment instruments:

 

Investment instruments are classified into two categories: Investments to maturity and Instruments available for sale. The category of Investments to maturity includes only those instruments in which it have the capacity and intention to hold them until their expiration date. The other investment instruments are considered as available-for-sale.

 

Financial assets held-to-maturity are recorded at their cost plus accrued interest and indexations less impairment provisions made when the carrying amount exceeds the estimated recoverable amount.

 

A financial asset classified as available-for-sale is initially recognized at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset, subsequently measured at their fair value based on market prices or valuation models. Unrealized gains or losses as a result of fair value adjustments are recorded in “Other comprehensive income” within Equity.  When these investments are sold, the cumulative fair value adjustment existing within equity is recorded directly in income under “Net financial operating income”.

 

Interest and indexations of financial assets held-to-maturity and available-for-sale are included in the line item “Interest revenue”.

 

Investment securities, which are subject to hedge accounting, are adjusted according to the rules for hedge accounting as described in Note No. 2 (l).

 

As of December 31, 2018 and 2017, the Bank does not held to maturity instruments.

 

30


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(o)                     Intangible:

 

Intangible assets are identified as non-monetary assets (separately identifiable from other assets) without physical substance which arise as a result of a legal transaction or are developed internally by the consolidated entities.  They are assets whose cost can be estimated reliably and from which the consolidated entities have control and consider it probable that future economic benefits will be generated. Intangible assets are recorded initially at acquisition cost and are subsequently measured at cost less any accumulated amortization or any accumulated impairment losses.

 

Software or computer programs purchased by the Bank and its subsidiaries are accounted for at cost less accumulated amortization and impairment losses.

 

The subsequent expense in software assets is capitalized only when it increases the future economic benefit for the specific asset.  All other expenses are recorded as an expense as incurred.

 

Amortization is recorded in income using the straight-line amortization method based on the estimated useful life of the software, from the date on which it is available for use.  The estimated useful life of software is a maximum of 6 years.

 

(p)                     Property and equipment:

 

Property and equipment includes the amount of land, real estate, furniture, computer equipment and other installations owned by the consolidated entities and which are for own use.  These assets are stated at historical cost less depreciation and accumulated impairment. This cost includes expenses than have been directly attributed to the asset’s acquisition.

 

Depreciation is recognized in income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment.

 

Estimated useful lives for 2018 and 2017 are as follows:

 

· Buildings

50 years

· Installations

10 years

· Equipment

5 years

· Supplies and accessories

5 years

 

Maintenance expenses relating to those assets held for own uses are recorded as expenses in the period in which they are incurred.

 

31


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(q)                     Deferred taxes and income taxes:

 

The income tax provision of the Bank and its subsidiaries has been determined in conformity with current legal provisions.

 

The Bank and its subsidiaries recognize, when appropriate, deferred tax assets and liabilities for future estimates of tax effects attributable to temporary differences between the book and tax values of assets and liabilities. Deferred tax assets and liabilities are measured based on the tax rate expected to be applied, in accordance with current tax law, in the year that deferred tax assets are realized or liabilities are settled.  The effects of future changes in tax legislation or tax rates are recognized in deferred taxes starting on the date of publication of the law approving such changes.

 

Deferred tax assets are recognized only when it is likely that future tax profits will be sufficient to recover deductions for temporary differences.  According to instructions from the Chilean Superintendency of Banks (“SBIF”), deferred taxes are presented in the the statement of financial position according to IAS 12 “Income Tax”.

 

(r)                        Assets received in lieu of payment:

 

Assets received or awarded in lieu of payment of loans and accounts receivable from customers are recorded, in the case of assets received in lieu of payment, at the price agreed by the parties, or otherwise, when the parties do not reach an agreement, at the amount at which the Bank is awarded those assets at a judicial auction.

 

Assets received in lieu of payment are classified under “Other Assets” and they are recorded at the lower of its carrying amount or net realizable value, less charge-off and presented net of a portfolio valuation allowance. The Superintendency of Banks requires regulatory charge-offs if the asset is not sold within a one year of foreclosure.

 

(s)                       Investment properties:

 

Investments properties are real estate assets held to earn rental income or for capital appreciation or both, but are not held-for-sale in the ordinary course of business or used for administrative purposes.  Investment properties are measured at cost, less accumulated depreciation and impairment and are presented under “Other Assets”.

 

(t)                        Debt issued:

 

Financial instruments issued by the Bank are classified in the Statement of Financial Position under “Debt issued” items, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder or to satisfy the obligation other than by the exchange of a fixed amount of cash.

 

Debt issued is subsequently measured at amortized cost using the effective interest rate. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(u)                     Provisions and contingent liabilities:

 

Provisions are liabilities involving uncertainty about their amount or maturity. They are recorded in the Statement of Financial Position when the following requirements are jointly met:

 

i)                     a present obligation has arisen from a past event and,

 

ii)                  as of the date of the financial statements it is probable that the Bank or its subsidiaries have to disburse resources to settle the obligation and the amount can be reliably measured.

 

A contingent asset or liability is any right or obligation arising from past events whose existence will be confirmed by one or more uncertain future events which are not within the control of the Bank.

 

The following are classified as contingent in the complementary information:

 

i.                                Guarantees and sureties: Comprises guarantees, sureties and standby letters of credit.  In addition it includes payment guarantees for purchases in factoring transactions.

 

ii.                             Confirmed foreign letters of credit: Corresponds to letters of credit confirmed by the Bank.

 

iii.                          Documentary letters of credit: Includes documentary letters of credit issued by the Bank which have not yet been negotiated.

 

iv.                         Documented guarantee: Guarantee with promissory notes.

 

v.                           Undrawn credit lines: The unused amount of credit lines that allow customers to draw without prior approval by the Bank (for example, using credit cards or overdrafts in checking accounts).

 

vi.                        Other credit commitments: Amounts not yet lent under committed loans, which must be disbursed at an agreed future date when events contractually agreed upon with the customer occur, such as in the case of lines of credit linked to the progress of a construction or similar projects.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(u)                     Provisions and contingent liabilities, continued:

 

vii.                     Other contingent loans: Includes any other kind of commitment by the Bank which may exist and give rise to lending when certain future events occur. In general, this includes unusual transactions such as pledges made to secure the payment of loans among third parties or derivative contracts made by third parties that may result in a payment obligation and are not covered by deposits.

 

Exposure to credit risk on contingent loans:

 

In order to calculate provisions on contingent loans, as indicated in Chapter B-3 of the Compendium of Accounting Standards of the Superintendency of Banks, the amount of exposure that must be considered shall be equivalent to the percentage of the amounts of contingent loans indicated below:

 

Type of contingent loan

 

Exposure

 

a) Guarantors and pledges

 

100

%

b) Confirmed foreign letters of credit

 

20

%

c) Documentary letters of credit issued

 

20

%

d) Guarantee deposits

 

50

%

e) Undrawn credit lines

 

35

%

f) Other loan commitments:

 

 

 

·   College education loans Law No. 20,027

 

15

%

·   Others

 

100

%

g) Other contingent loans

 

100

%

 

Notwithstanding the above, when dealing with transactions performed with customers with overdue loans as indicated in Chapter B-1 of the Compendium of Accounting Standards of the SBIF: Impaired and/or Written-down Loans, that exposure shall be equivalent to 100% of its contingent loans.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(v)                     Provisions for minimum dividends:

 

According with the Compendium of Accounting Standards of the SBIF, the Bank records within liabilities the portion of net income for the year that should be distributed to comply with the Corporations Law or its dividend policy.  For these purposes, the Bank establishes a provision in a complementary equity account within retained earnings.

 

Distributable net income is considered for the purpose of calculating a minimum dividends provision, which in accordance with the Bank’s bylaws is defined as that which results from reducing or adding to net income the value of price-level restatement for the concept of restatement or adjustment of paid-in capital and reserves for the year.

 

(w)                   Employee benefits:

 

(i)                 Staff accrued vacations

 

The annual costs of vacations and staff benefits are recognized on an accrual basis.

 

(ii)              Short-term benefits

 

The Bank has a yearly bonus plan for its employees based on their ability to meet objectives and their individual contribution to the company’s results, consisting of a given number or portion of monthly salaries. It is provisioned for based on the estimated amount to be distributed.

 

(iii)                  Staff severance indemnities

 

Banco de Chile has recorded a liability for long-term severance indemnities in accordance with employment contracts it has with certain employees. The liability, which is payable to specified retiring employees with 30 or 35 years of service, is recorded at the present value of the accrued benefits, which are calculated by applying a real discount rate to the benefit accrued as of year-end over the estimated average remaining service period.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(w)                   Employee benefits, continued:

 

(iii)                  Staff severance indemnities, continued:

 

Obligations for this defined benefits plan are valued according to the projected unit credit actuarial valuation method, using inputs such as staff turnover rates, expected salary growth in wages and probability that this benefit will be used, discounted at current long-term rates (4.25% as of December 31, 2018 and 4.53% as of December 31, 2017).

 

The discount rate used corresponds to the rate of 10-year Chilean Central Bank Bonds in pesos (BCP).

 

Losses and gains caused by changes in actuarial variables are recognized in Other Comprehensive Results. There are no other additional costs that must be recognized by the Bank.

 

(x)                     Earnings per share:

 

Basic earnings per share is determined by dividing net income for the year attributable to the Bank by the average weighted number of shares in circulation during that period.

 

Diluted earnings per share are determined similarly to basic earnings, but the weighted average number of outstanding shares is adjusted to take into account the potential dilutive effect of the options on shares, warrants and convertible debt.  As of December 31, 2018 and 2017 there are no concepts to adjust.

 

(y)                     Interest revenue and expense:

 

Interest income and expenses are recognized in the income statement using the effective interest rate method.  The effective interest rate is the rate which exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument (or a shorter period) where appropriate, to the carrying amount of the financial asset or financial liability.  To calculate the effective interest rate, the Bank determines cash flows by taking into account all contractual conditions of the financial instrument, excluding future credit losses.

 

The effective interest rate calculation includes all fees and other amounts paid or received that form part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the purchase or issuance of a financial asset or liability.

 

For its impaired portfolio and high risk loans and accounts receivables from clients, the Bank has applied a conservative position of discontinuing accrual-basis recognition of interest revenue in the income statement; they are only recorded once received. In accordance with the above, suspension occurs in the following cases:

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                           Summary of Significant Accounting Principles, continued:

 

(y)                     Interest revenue and expense, continued:

 

Loans with individual evaluation:

 

·                      Loans classified in categories C5 and C6:  Accrual is suspended by the sole fact of being in the impaired portfolio.

 

·                      Loans classified in categories C3 and C4:  The accrual is suspended after have fulfilled three months in the impaired portfolio.

 

Group evaluation loans:

 

·                      Any credit, with the exception of those that have guarantees that reach at least 80%: The accrual is suspended when the credit or one of its installments has reached six months of delay in its payment.

 

Notwithstanding the above, in the case of loans subject to individual evaluation, recognition of income from accrual of interest and readjustments can be maintained for loans that are being paid normally and which correspond to obligations whose cash flows are independent, as can occur in the case of project financing.

 

The suspension of recognition of revenue on an accrual basis means that, while the credits are kept in the impaired portfolio, the related assets included in the Consolidated Statement of Financial Position will increase with no interest, or fees and adjustments in the Consolidated Statement of Comprehensive Income, and income will not be recognized for these items, unless they are actually received.

 

(z)                      Fees and commissions:

 

Revenue and expenses from fees are recognized in the Consolidated Income Statement using the criteria established in IFRS 15 “Revenue from contracts with customers”.

 

Under IFRS 15, revenues are recognized considering the terms of the contract with customers. Revenue is recognized when or as the performance obligation is satisfied by transferring the goods or services committed to the customer.

 

Under IFRS 15, revenues are recognized using different criteria depending on their nature. The most significant are:

 

·                             Those that correspond to a singular act, when the act that originates them takes place.

 

·                                Those that originate in transactions or services that are extended over time, during the life of such transactions or services.

 

·                                Commissions on loan commitments and other fees related to credit operations are deferred (together with the incremental costs directly related to the placement) and recognized as an adjustment to the effective interest rate of the placement. In the case of loan commitments, when there is no certainty of the date of effective placement, the commissions are recognized in the period of the commitment that originates it on a linear basis.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(z)                      Fees and commissions, continued:

 

The fees registered by the Bank correspond mainly to:

 

·                                Commissions for lines of credit and overdrafts: they are accrued in the period related to the granting of lines of credit and overdrafts in current account.

 

·                                Commissions for guarantees and letters of credit: they are accrued in the period related to the granting of payment guarantees for real or contingent obligations of third parties.

 

·                                Commissions for card services: correspond to commissions earned and accrued during the period, related to the use of credit, debit and other cards.

 

·                                Commissions for account management: includes commissions for the maintenance of current accounts and other deposit accounts.

 

·                                Commissions for collections, collections and payments: correspond to collection, collection and payments services provided by the Bank.

 

·                                Commissions for intermediation and management of securities: correspond to income from brokerage service, placements, administration and custody of securities.

 

·                                Remuneration for insurance commercialization: Income generated by the sale of insurance is included.

 

·                                Commissions for investments in mutual funds and others: corresponds to commissions originated in the administration of mutual funds.

 

·                                Other commissions earned: Income generated by currency changes, financial advice, use of distribution channels, use of trademark agreement and placement of financial products and cash transfers, among others.

 

Fees for commissions include:

 

·                                Remuneration for card operations: commissions paid for the operation of credit and debit cards are included.

 

·                                Inter-bank transactions: Corresponds to commissions paid to the automatic clearing house for transactions carried out.

 

·                                Commissions for operations with securities: commissions for deposit and custody of securities and brokerage of securities are included.

 

·                                Other commissions: commissions for collection, payments and other online services are included.

 

(aa)              Identifying and measuring impairment:

 

Financial assets, different to loans to customers

 

Financial assets are reviewed throughout each year, and especially at each reporting date, to determine whether there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and the loss event had an impact on the estimated future cash flows of the financial asset that can be reliably calculated.

 

An impairment loss for financial assets (different to loans to customers) recorded at amortized cost is calculated as the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted using the effective interest rate original.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of consolidated financial statements originally issued in Spanish)

 


 

2.                            Summary of Significant Accounting Principles, continued:

 

(aa)              Identifying and measuring impairment, continued:

 

An impairment loss on a financial asset available-for-sale is calculated based on its fair value. In this case, the objective evidence includes a significant and prolonged decline, under the original investment cost in the fair value of the investment.

 

If there is evidence of impairment, any amount previously recognized in equity, net gains (losses) not recognized in the income statement, are removed from equity and recognized in the income statement for the year, presenting as net gains (losses) related to financial assets available-for-sale. This amount is determined as the difference between the acquisition cost (net of any repayment and amortization) and the current fair value of the asset, less any impairment loss on that investment that has been previously recognized in the income statement.

 

When the fair value of the available-for-sale debt security recovers to, at least, amortized cost, it is no longer considered impaired and subsequent changes in fair value are reported in equity.

 

All impairment losses are recognized in the income statement.  Any cumulative loss related to available-for-sale financial assets recognized previously in equity is transferred to the income statement.

 

An impairment loss can only be reversed if it can be related objectively to an event occurring after the impairment loss was recognized. The amount of the reversal is recognized in profit or loss up to the amount previously recognized as impairment. An impairment loss is reversed if, in a subsequent period, the fair value of the debt instrument classified as available-for-sale in